Dave Baker

It's dense stuff, but the regulations under section 410(B) (click) have the "official" examples. One Q&A in the 401(k) column on BenefitsLink has some good discussion of minimum coverage in the context of employers who are members of a controlled group (where the minimum coverage rules get fun ) -- http://www.benefitslink.com/benefits-bin/q...atabase=qa_401k

More information here: http://benefitslink.com/boards/index.php?showtopic=2910 http://benefitslink.com/boards/index.php?showtopic=4359 http://www.benefitslink.com/links/19980712-000611.shtml http://www.benefitslink.com/links/19991129-003346.shtml http://www.benefitslink.com/links/19990728-002373.shtml http://www.benefitslink.com/links/19980312-000326.shtml http://www.benefitslink.com/links/19990817-002513.shtml http://www.benefitslink.com/links/19990219-001348.shtml http://www.benefitslink.com/links/19990708-002217.shtml

A list of commercial providers of this data appears here: http://www.benefitslink.com/yellowpages/mark_dat.shtml

I have never seen a bunch as motivated as the pre-paid legal crew. Must be hellacious commissions, super-pumped motivational programs or prospects of big sales opportunities (or all three). Thing that makes me mad is the way my town (Orlando) is plastered with illegal "Make Money At Home; 27-Year-Old NYSE Company; Start-Up Opportunity" signs on telephone poles, streetlights, etc. -- which turns out to be a pre-paid legal services company when you dial the 800 number.

I dunno, but you'll find this interesting: Challenging Long Term Disability and Health Benefit Denials Under ERISA, by attorney Edward G. Connette, published by the Health Administration Responsibility Project Excerpt: "This paper will discuss procedures for challenging Long Term Disability ('LTD') and health benefits coverage denials under ERISA ... the majority of reported decisions arise from cases challenging health benefits denials for procedures or drugs deemed 'experimental,' 'investigative' or 'not medically necessary' ... the most commonly litigated issue today is coverage for various HDC/PSCR treatment protocols for breast, ovarian and brain cancer patients." Link: http://www.benefitslink.com/links/20000727...27-006369.shtml

The 2000 final regs are here: http://www.benefitslink.com/taxregs/72p-final.shtml

Here's a link to the sample language that came to me in 1998 -- probably hasn't been changed -- seems to be the Cincinnati language Christine refers to. This version doesn't have 401(k)-specific language, though. I know there is sample language out there for 401(k) plans. http://www.benefitslink.com/articles/terml...mlanguage.shtml

Here's a link to an interesting article about ERISA's enactment, with considerable discussion of the governmental plans exception from ERISA coverage: http://www.benefitslink.com/links/20000912...12-006899.shtml

http://www.benefitslink.com/articles/reform000907.shtml (click) Provocative. Comments, anybody?

Were they supposed to be in Plan A all along? Why? (Plan document? Plan B only covers employees of Company B?)

Don't think so -- but is the insurance is not on the life of the IRA owner or a relative? Or are you concerned about the prohibition against IRAs investing in life insurance?

Sounds like you might have your answer, if it's really the "applicable definition" ... maybe something for the plan administrator to determine, if there's some ambiguity in the plan's definition? I'd think it's OK to define (or construe) compensation to include such disability for purposes of ERISA, but you'd have a potential discrimination-in-favor-of-HCEs issue and my guess is that such an expansive definition might go beyond the section 404 definition of compensation, which could be important if the plan is close to the 15%-of-aggregate-compensation deduction limit (for a profit sharing plan). I seem to recall something fairly recently added to 404 or another code section about plans being permitted to count certain disability payments until retirement age as compensation if the plan so chooses, come to think of it.

I wouldn't think the plan document would provide the participant with an account balance as of today that takes into account as-yet-uncontributed assets, even though the individual eventually will have more money "as of" the valuation date when the assets are contributed. As of today, he or she is entitled to a certain proportion (slice) of the pie, but the pie isn't as big as it's going to be in a few months. The participant can take the slice now and get another sliver as a supplemental distribution after the contribution has been made.

More articles re fringe benefit ideas are here: http://www.benefitslink.com/index/fringebe...ral/index.shtml

Link to the opinion is at http://www.benefitslink.com/links/20000801...01-006422.shtml Anybody think the Tax Court got anything wrong, in its reasoning or result?

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Final Regulations Issued: Repayment of Previously-Taxed Participant Loan * * * Repayment of previously-taxed loan. If the loan is repaid after the deemed distribution has occurred, the repayments (including repayments of interest) are treated as tax basis. See http://www.benefitslink.com/taxregs/72p-final.shtml#QA21 . To the extent a previously-taxed loan is repaid, that portion is no longer a receivable, but reflects part of the non-loan assets included in the participant's account balance (or accrued benefit, in the case of a defined benefit plan). That portion is part of the reportable gross distribution, so the tax basis generated from those repayments is taken into account to determine the taxable portion of that gross distribution. Note that loan repayments are not treated as employee contributions for purposes of the nondiscrimination test under §401(m) nor for purposes of the §415 limits, even though tax basis is generated by such loan repayments. See the last sentence of Q&A-21(a). <UL>Example. Suppose in the earlier example; click that Bill recommenced loan payments in 2002. By the time the plan makes the lump sum distribution to Bill, the loan receivable balance is only $10,400. The total loan payments made by Bill after the deemed distribution totaled $5,920, which included additional interest. Now Bill's account consists of $10,400 loan receivable and $69,115 cash. The cash consists of the $61,300 assumed in the prior example, plus the loan repayments of $5,920, plus an additional $1,895 of investment earnings that were generated because of the loan repayments made by Bill. The plan reports a gross distribution of $69,115, but the taxable portion of that distribution is only $63,195. Bill has tax basis of $5,920, which represents his total loan repayments following the deemed distribution of the loan.</UL>

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Final Regulations Issued: Crediting of Tax Basis on Defaulted Participant Loan at Time of Offset * * * Effective date. The regulations are effective for loans made on or after January 1, 2002. See Q&A-22(B) [click]. (The 1998 proposed regulations clarified that the effective date would be no earlier than the January 1 which is at least 6 months following the publication of final regulations.) The plan year of the plan is irrelevant. In other words, all plans become subject to the regulations as of January 1, 2002, even if that date occurs in the middle of a plan year. This effective date does not mean that plans may ignore IRC §72(p) before January 1, 2002. The statutory effective date of §72(p) was for loans made after August 13, 1982 (although the quarterly amortization rule and some changes to the principal residence loans did not apply until after 1986). Between the applicable statutory date of any provision of §72(p) and the regulatory effective date, plan administrators must apply a reasonable, good faith standard of compliance. Compliance with the proposed regulations, or any provisions of these final regulations, before the regulatory effective date would be treated as satisfying the good faith compliance standard. The final regulations follow the proposed regulations very closely, so a detailed analysis is not provided in this summary. Here are some highlights. * * * No basis credited because of deemed distribution/reporting rules when defaulted loan is later offset. When a loan becomes a deemed distribution, the amount taxed is not credited as tax basis. However, see the transition rule in Q&A-22© [click], where accrued interest that was taxed as a deemed distribution is treated as tax basis. When the plan offsets the loan receivable, the offset amount is not reported again as part of the participant's gross distribution. In other words, the prior deemed distribution of the loan is treated as the distribution of that loan for reporting purposes, so the cashless portion of the distribution that represents the loan offset is not reported. Since the loan receivable is not reported when it is offset, there is no need to credit basis for that loan. Interest that accrues after the deemed distribution is also not reported as part of the gross distribution when the loan offset later occurs, even though the accrued interest was not previously subject to taxation. Example. Bill defaulted on a participant loan in 2000. At the time of the default, the plan deemed a distribution of $12,150. That was reported on Form 1099-R for the calendar year in which the default occurred. The loan receivable remained an asset of the plan because there was no distribution event with respect to the defaulted amount. The plan posted accrued interest, but did not report it as a deemed distribution. In 2003, Bill terminates employment and requests a lump sum distribution of his account. At the time of the distribution, Bill's account consists of $61,300 cash and $15,250 loan receivable, (which includes the $12,150 initial default amount and $3,100 accrued interest). The plan offsets the loan receivable and the accrued interest and distributes the cash (20% of which is withheld for federal income taxes). The Form 1099-R should report a gross distribution of $61,300, which is the cash portion of Bill's account, and shows the same amount as the taxable distribution because Bill does not have any tax basis. He does not get tax basis for the previously-taxed loan because the loan offset is not reported as part of the gross distribution. Since the loan receivable and the accrued interest are not treated as part of the distribution, the 20% withholding liability is calculated only on the cash portion of $61,300.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Final Regulations Issued: Accruing Interest on Defaulted Participant Loan * * * Effective date. The regulations are effective for loans made on or after January 1, 2002. See Q&A-22(B) [click]. (The 1998 proposed regulations clarified that the effective date would be no earlier than the January 1 which is at least 6 months following the publication of final regulations.) The plan year of the plan is irrelevant. In other words, all plans become subject to the regulations as of January 1, 2002, even if that date occurs in the middle of a plan year. This effective date does not mean that plans may ignore IRC §72(p) before January 1, 2002. The statutory effective date of §72(p) was for loans made after August 13, 1982 (although the quarterly amortization rule and some changes to the principal residence loans did not apply until after 1986). Between the applicable statutory date of any provision of §72(p) and the regulatory effective date, plan administrators must apply a reasonable, good faith standard of compliance. Compliance with the proposed regulations, or any provisions of these final regulations, before the regulatory effective date would be treated as satisfying the good faith compliance standard. The final regulations follow the proposed regulations very closely, so a detailed analysis is not provided in this summary. Here are some highlights. * * * Accruing interest on defaulted loans. addresses the treatment of accrued interest following the taxation of a loan as a deemed distribution, adopting the rules as they were stated in the proposed regulations. After a loan is deemed distributed under section 72(p) (e.g., the plan goes into default, as described in Q&A-10), interest that accrues thereafter is disregarded for section 72 purposes. That means the accrued interest is not taxable, neither at the time it accrues nor at the time the loan receivable is later offset. However, until an offset occurs, the accrued interest is taken into account to determine the maximum amount of any subsequent loan to the participant. (Note that the offset is an actual distribution event and cannot be permitted before an actual distribution is permitted under the plan. Until there is an actual distribution, the loan is not treated as a distribution for qualification purposes, only for tax purposes.) Example. Lynn borrows $10,000 from her employer's profit sharing plan. The loan is not repaid through payroll withholding deductions. Instead, Lynn must make monthly installment payments by writing a check to the plan for each payment. As of December 31, 2002, the outstanding balance becomes a deemed distribution because of a monthly payment missed on September 30, 2002. (Lynn makes no payments between September 30, 2002, through December 31, 2002, that can be treated as covering the missed payment.) The outstanding balance as of December 31, 2002, is $8,250 (which includes accrued interest through that date). That amount is taxed as a deemed distribution under section 72(p). Under the terms of the plan, distribution is not available to Lynn, so the loan amount cannot be offset at the time of default. After December 31, 2002, interest continues to accrue at $200 per month. The post-2002 accrued interest is not included in Lynn's income. However, the accrued interest is added to the deemed distribution amount ($8,250) to determine whether any subsequent loan made to Lynn satisfies the limitations under section 72(p). As a non-401(k) profit sharing plan, the plan could be written to treat default as a distribution event, which would trigger a loan offset, i.e., an actual distribution, coincident with the default. The example assumes the plan does not contain this provision. If such a provision were in the plan, Lynn's account would be offset by the unpaid loan balance, and would be reported as an actual distribution, rather than as a deemed distribution. No interest would accrue and there would be no outstanding loan to Lynn if a new loan were to be made to her. Note that proposed regulations also issued today (see separate summary above) would impose additional conditions if another loan is made to the participant before the defaulted loan is offset. These conditions are designed to ensure that any subsequent loan is more likely to be repaid.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Final Regulations Issued: Guidance on Electronic Media in Connection With Participant Loans * * * Effective date. The regulations are effective for loans made on or after January 1, 2002. See Q&A-22(B) [click]. (The 1998 proposed regulations clarified that the effective date would be no earlier than the January 1 which is at least 6 months following the publication of final regulations.) The plan year of the plan is irrelevant. In other words, all plans become subject to the regulations as of January 1, 2002, even if that date occurs in the middle of a plan year. This effective date does not mean that plans may ignore IRC §72(p) before January 1, 2002. The statutory effective date of §72(p) was for loans made after August 13, 1982 (although the quarterly amortization rule and some changes to the principal residence loans did not apply until after 1986). Between the applicable statutory date of any provision of §72(p) and the regulatory effective date, plan administrators must apply a reasonable, good faith standard of compliance. Compliance with the proposed regulations, or any provisions of these final regulations, before the regulatory effective date would be treated as satisfying the good faith compliance standard. The final regulations follow the proposed regulations very closely, so a detailed analysis is not provided in this summary. Here are some highlights. * * * Guidance on electronic media. The regulations require that the loan be evidenced by an enforceable agreement that sets forth: the amount of the loan, the date of the loan, and the repayment schedule. See Q&A-3(B) [click]. The enforceable agreement may be in the form of a written paper document or in an electronic medium. The principles set forth in Treas. Reg. §1.411(a)-11(f)(2), regarding the use of electronic media to obtain participant consent to a distribution, are applied here as well. The electronic medium must: be reasonably accessible to the participant, be reasonably designed to preclude any individual other than the participant from requesting a loan, provide a reasonable opportunity for the participant to confirm, modify or rescind the terms of the loan before the loan is made, [and] provide confirmation of the loan within a reasonable time after the loan is made. Confirmation may be provided in a paper document or electronically. If the confirmation is provided electronically, it must be designed in a manner that is no less understandable than a written paper document, and the participant must be advised that he or she may request a written paper document at no charge. An agreement does not have to be signed by the participant, so long as under applicable law, the agreement is legally enforceable without a signature. The purpose of this clarification in the final regulations is to enable plans to process loans electronically without a signature, if such procedure does not compromise the enforceability of the loan agreement. The IRS had taken this position in an informal ruling issued on June 26, 1997, which was reprinted in CCH Pension Plan Guide, ¶17,396L.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Final Regulations Issued: Cure Period for Defaulted Loans , Q&A-1 through Q&A-19, and Q&A-21 through Q&A-22, 65 F.R. 46588 (July 31, 2000), provide guidance, in question-and-answer format, on the tax issues relating to participant loans, as set forth in IRC §72(p). A loan is taxed as a distribution unless it satisfies the requirements of §72(p)(2). The regulations finalize two sets of proposed regulations, one issued in 1995 and the other issued in 1998. The 1998 proposed regulations supplemented the 1995 proposed regulations, to provide guidance on the treatment of accrued interest after a plan loan is deemed to be distributed under section 72(p), tax basis issues relating to a deemed distribution, and the effective date of the regulations. Along with these final regulations, the Treasury is issuing a new set of proposed regulations [click] ... to address refinancing transactions, the tax treatment of multiple loans, and military service leave. Effective date. The regulations are effective for loans made on or after January 1, 2002. See Q&A-22(B) [click]. (The 1998 proposed regulations clarified that the effective date would be no earlier than the January 1 which is at least 6 months following the publication of final regulations.) The plan year of the plan is irrelevant. In other words, all plans become subject to the regulations as of January 1, 2002, even if that date occurs in the middle of a plan year. This effective date does not mean that plans may ignore IRC §72(p) before January 1, 2002. The statutory effective date of §72(p) was for loans made after August 13, 1982 (although the quarterly amortization rule and some changes to the principal residence loans did not apply until after 1986). Between the applicable statutory date of any provision of §72(p) and the regulatory effective date, plan administrators must apply a reasonable, good faith standard of compliance. Compliance with the proposed regulations, or any provisions of these final regulations, before the regulatory effective date would be treated as satisfying the good faith compliance standard. The final regulations follow the proposed regulations very closely, so a detailed analysis is not provided in this summary. Here are some highlights. Cure period for defaulted loans. The final regulations retain the rules for correcting missed loan payments before a deemed distribution, due to default, must be triggered. The proposed regulations had referred to this as a "grace period," but the final regulations call it a "cure period." Q&A-10(a) of the regulations permits the cure period to run through the end of the calendar quarter that follows the calendar quarter in which the missed installment payment was due. When the loan is in default (taking into account any permitted cure period), the entire balance due is taxable, including accrued interest through the date of default. Example. A participant is making monthly installments on a loan from the plan. The participant misses the payment due August 31, 2003, and subsequent monthly payments. The provides a 3-month cure period. The cure period for the August 31, 2003, payment ends November 30, 2003. The amount is not paid by then. The taxable distribution is $17,157, which represents the participant's outstanding loan balance, but interest accrued through November 30, 2003. In an alternative scenario, the regulations provide that the plan's cure period ends on the last day of the calendar quarter following the quarter in which the installment payment is missed. In that case, the cure period would not end until December 31, 2003, so there would be an additional month of accrued interest. In the example, the taxable distribution is increased to $17,282.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users of BenefitsBoards.net! Loans Made While a Deemed Distribution Loan Remains Unpaid [Effective date.] Prop. Treas. Reg. §1.72(p)-1 [click], Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard. * * * A loan that is deemed distributed under §72(p) is considered outstanding for purposes of applying the loan limits under §72(p)(2)(A) until the loan is repaid (either through payments made by the participant or by a loan offset). See . Proposed Q&A-19(B)(2) [click] will establish additional requirements on a subsequent loan that is made before the deemed distributed loan is repaid. If these conditions are not satisfied, the subsequent loan is treated in its entirety as a deemed distribution under §72(p). To satisfy Proposed Q&A-19(B)(2), one of the following conditions must be met: repayments on the subsequent are mande under a payroll withholding arrangement that is enforceable under applicable law, or the plan receives adequate security from the participant that is in addition to the participant's accrued benefit under the plan (i.e., the plan obtains other collateral for the loan). The payroll withholding arrangement described in 1) may be revocable but, if the participant later revokes the arrangement, the outstanding balance of the loan is deemed distributed. Similarly, if the additional collateral is no longer in force before the subsequent loan is repaid, the outstanding balance of the loan becomes a deemed distribution.

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users! Proposed Regulations Issued To Cover Multiple Loans [Effective date.] Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard. If a participant receives multiple loans, each loan must satisfy §72(p), taking into account the outstanding balance of each existing loan, as under current rules. The refinancing rules discussed elsewhere; click do not apply because the new loan is not replacing the existing loan(s). However, Proposed Q&A-20(a)(3) [click] establishes a limit of two loans within the same calendar year. The plan may apply this rule on a plan year basis or on the basis of another consistent 12-month period, rather than the calendar year. If a loan is made in violation of this rule, the entire amount is treated as a deemed distribution, even if the limits of IRC §72(p)(2) are otherwise satisfied. The Treasury is concerned that too many loans within a year might circumvent the §72(p)(2) limits, particularly with respect to the $50,000 maximum loan limit under §72(p)(2)(A)(i). Note that this rule will not take effect until these proposed regulations are finalized [see discussion above]. For loans made before the effective date, the plan may allow more than two loans in a year, and the loan limits must be applied to each loan under a reasonable, good faith interpretation of §72(p).

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission. Copyright 2000 TRI Pension Services, all rights reserved. Post a reply to this thread if you would like to discuss comments or questions about this article with other users! Proposed Regulations Issued To Cover Loan Refinancing Transactions [Effective date.] <a href="http://www.benefitslink.com/taxregs/72p-proposed-2000.shtml">Prop. Treas. Reg. §1.72(p)-1 [click]</a>, Q&A-9(B) and ©, Q&A-19, Q&A-20, Q&A-22(d), 65 F.R. 46677 (July 31, 2000), supplement final regulations issued today under IRC §72(p) ... The proposed regulations will apply to loans made on or after the first January 1 which is at least six months after the regulations are finalized. Since January 1, 2001, is already less than six months away, the earliest effective date for the rules contained in these proposed regulations will be January 1, 2002 (assuming final regulations are issued by June 30, 2001). For earlier loans, a reasonable, good faith compliance standard applies. Presumably, following these proposed regulations will satisfy this good faith standard. * * * One of the issues that has perplexed plan administrators is how to apply the rules of IRC §72(p) when an existing loan is refinanced, or a new loan is made that also repays the existing loan. Some administrators have employed a very conservative approach, prohibiting any additional loans until an existing loan is fully repaid and prohibiting the refinancing or renegotiation of an existing loan. In <a href="http://www.cyberisa.com/erisa_book.htm">The ERISA Outline Book [click]</a>, we have provided suggested methods for using refinancing transactions to replace an existing loan. See Chapter 7, Section IX, Part B.1.b., of the 1999-2000 edition. Happily, these proposed regulations adopt the arguments we have used in the Outline Book to support these suggested methods. Definition of a refinancing transaction. Proposed Q&A-20(a) defines a refinancing as any situation in which one loan replaces another. This might occur because the participant wants to add to the outstanding loan amount, but does not want to, or the plan will not permit him to, have more than one loan outstanding at a time. This also might occur because the interest rate or the repayment term is being renegotiated (e.g., to reflect a lower interest rate, or to provide more time to repay the outstanding loan balance). A refinanced loan is treated as a new loan for purposes of §72(p). That means the interest rate and the security interest on the refinanced loan must be determined as of the date of the refinancing. Thus, the interest rate under the replaced loan might not be an appropriate interest rate under the refinanced loan, because the plan must now redetermine what is a commercially reasonable interest rate. In addition, the 50% limit under IRC §72(p)(2)(A) must be redetermined to take into account the participant's vested accrued benefit as of the date of the refinancing. How to apply §72(p) to refinancing transactions. If the loan that is replacing the original loan (the replacement loan) has a term which ends later than the term of the loan being replaced (the replaced loan), then both the replacement loan and the replaced loan are treated as outstanding on the date of the refinancing transaction. See Proposed Q&A-20(a)(2). Thus, two loans collectively must satisfy the requirements of IRC §72(p), or there will be deemed distribution consequences, in accordance with the rules set forth in the §72(p) regulations. For example, if the sum of the amount of the replacement loan and the outstanding balance of the replaced loan (plus any other existing loans not being replaced) exceeds the amount limitations under IRC §72(p)(2)(A), the excess is taxed as a deemed distribution. However, if the term of the replacement loan does not end later than the term of the replaced loan, the replaced loan is disregarded in determining whether the replacement loan satisfies §72(p), and only the amount of the replacement loan (plus the outstanding balance of any existing loans that are not being replaced) are taken into account. Exception. The rule described in the first sentence of the prior paragraph does not apply if the replacement loan would satisfy §72(p)(2) if it were analyzed as two separate loans - one representing the replaced loan, amortized in substantially level payments over a period ending no later than the last day of the original term of that replaced loan, and the other one representing the difference between the amount of the replacement loan and the outstanding balance of the replaced loan. In other words, if the replacement loan would effectively amortize an amount equal to the replaced loan over a period that does not exceed the original term of the replaced loan, the Treasury does not feel that the refinancing transaction is being used to circumvent §72(p), so there is no need to take into account the outstanding balance of the replaced loan to determine whether the amount of the replacement loan satisfies §72(p). When this exception applies, the plan only needs to take into account the amount of the replacement loan plus any existing loans which are not being replaced to determine if the §72(p)(2) limitations are violated. The following two examples illustrate these rules. Additional examples are provided in the proposed regulations. Example - increasing loan and starting new 5-year term. Will has a vested account balance of $23,000 as of December 1, 2002. He receives a loan for $8,000. The loan bears the maximum 5-year payment term, so the loan will not be fully amortized until November 30, 2007. On June 1, 2004, Will has an outstanding balance of $6,000 on the original loan. As of that date, his vested account balance is $32,000. Will's loan limit is now $16,000 (i.e., 50% x $32,000), $6,000 of which is outstanding. Will needs $4,000 additional cash. The plan lends Will another $4,000 on June 1, 2004, and starts a new 5-year repayment term ending May 31, 2009. The new loan requires monthly amortization (deducted through payroll withholding). The principal of the new loan (i.e., the replacement loan) is $10,000, which represents the $4,000 of additional cash given Will and the $6,000 outstanding balance on the original loan (i.e., the replaced loan). In other words, the replacement loan pays off the outstanding balance of the replaced loan, and also gives Will another $4,000. The refinancing transactions satisfies the requirements of Proposed Q&A-22. The replaced loan had an outstanding balance of $6,000. The replacement loan is for $10,000. Since the repayment term of the replacement loan ends after the term of the replaced loan, the plan must treat both loans as outstanding on June 1, 2004, to determine if the §72(p)(2) limits have been exceeded. If we add the loans together, we get a total of $16,000. Will's 50% limit under §72(p)(2)(A) is $16,000 because, as of the date of the replacement loan, Will's vested account balance is $32,000. In addition, the repayment rules of §72(p)(2)(B) and © have not been violated by either loan. Compliance with the repayment rules is determined separately with respect to each loan because the replacement loan is treated as a separate, new loan. The replaced loan had a term that would have ended on November 30, 2007. The loan, during its existence, satisfied the level amortization requirements, and the refinancing transaction has resulted in that loan being paid in full. The replacement loan also does not violate §72(p)(2)(B) and ©. It has a repayment term that does not exceed 5 years from the date of that loan, and the loan provides for level amortization on at least a quarterly basis. The plan could have made a separate loan to Will in the amount of $10,000, assuming the plan permits more than one loan to be outstanding at a time. A new loan of $10,000 plus an outstanding loan balance of $6,000 would have equaled Will's maximum loan limit on June 1, 2004, which is $16,000. Will could then have used $10,000 of the proceeds from the second loan. The net effect of this alternative approach is the same as the refinancing example, illustrating why the proposed regulations approve of the refinancing transaction. By disbursing an additional $4,000 to Will and treating a new loan of $10,000 to have started on June 1, 2004, the plan is simply consolidating steps. Example - 50% loan limit would be exceeded if replacement loan were added to outstanding balance of replaced loan. Let's modify the prior example slightly. Suppose Will's vested account balance as of June 1, 2004, is only $26,000, because of market fluctuations on his non-loan investments in his account. Now, Will could not have two loans outstanding that total $16,000, because his maximum loan limit is only $13,000. Therefore, the plan can't treat Will as receiving a second loan for $10,000, and using $6,000 of the proceeds from the second loan to retire the first loan, as suggested in the prior example. What options are available here? <UL> Option #1 - separate loans (i.e., don't do any refinancing). Make a separate loan for $4,000 (rather than for $10,000), which is the additional cash that Will needs. The origination date of the separate loan is June 1, 2004. Will continues to amortize his original loan over its remaining term (which ends November 30, 2000), which has a balance of $6,000 at this time, and he starts a new amortization period on the second loan of $4,000, which would have a separate repayment term that could end as late as May 31, 2009 (i.e., 5 years after the origination date). This option is available only if the plan permits Will to have more than one loan outstanding at a time. Since the original loan is not being replaced by the second loan, the plan simply adds the outstanding balance of the first loan to the amount of the second loan to determine if the limits of §72(p)(2)(A) are satisfied, using Will's vested account balance at the time of the second loan to make such determination. Option #2 - refinancing of the original loan with original repayment term. Another option is to consolidate Will's loans into a single loan of $10,000 as of June 1, 2004, through a refinancing transaction. The replacement loan is for $10,000, but only $4,000 is disbursed to Will because the other $6,000 is used to payoff the original loan. However, the repayment term of the replacement term ends November 30, 2007, which is the same date as the original loan. Since the term of the replacement loan is not later than the term of the replaced loan, the plan does not treat the replaced loan as outstanding at the time of the replacement loan for purposes of §72(p)(2). Proposed Q&A-20(a)(2) applies only if the term of the replacement loan ends later than the term of the replaced loan. Thus, the plan looks only at the replacement loan to determine if the limitations under §72(p)(2)(A) have been exceeded. A loan of $10,000 does not exceed Will's loan limit of $13,000, so §72(p)(2)(A) is not violated. In addition, the replacement loan has a repayment term that does not exceed the 5-year rule under §72(p)(2)(B) and the amortization schedule satisfies the requirements of §72(p)(2)©. After the refinancing transaction, Will's loan payments will be greater because he is amortizing a greater amount over the remainder of the term of the replaced loan. Option #3 - refinancing of the original loan with a new repayment term which amortizes the original loan within its original term. Under this option, the plan disburses $4,000 to Will and consolidates the first loan and the second loan into a refinanced loan for $10,000, as under Option #2, effective June 1, 2004. The difference from Option #2 is that instead of having the $10,000 loan fully amortized by November 30, 2007 (as under Option #2), the new loan has a full 5-year amortization term that ends May 31, 2009, (or an earlier date that is later than November 30, 2007). However, the amortization schedule is structured so that at least $6,000 of the principal (which was the loan balance on the replaced loan at the time of the refinancing) is amortized by the original term of the replaced loan (i.e., November 30, 2007), and the difference is amortized on a level basis during the new 5-year term. This would be accomplished by having Will's payments through November 30, 2007, equal the payments under the replaced loan (as adjusted, if necessary, to reflect a change in the applicable interest rate under the refinanced loan) plus an additional amount needed to amortize the additional $4,000 over a 5-year period starting June 1, 2004, and his payments from December 1, 2007, through May 31, 2009, equal only to the amount needed to finish amortizing the additional $4,000. To illustrate, suppose the replaced loan had monthly payments of $100, and monthly amortization of an additional $4,000 over 5 years requires additional monthly payments of $65. Also suppose that there has been no change in the interest rate. Under this option, Will would pay $165 per month under the replacement loan until November 30, 2007, and then only $65 for December 2007 through May 2009. Since the outstanding balance of the replaced loan is still being repaid by November 30, 2007, the plan does not treat the replaced loan as outstanding at the time of the replacement loan for purposes of §72(p)(2). See Proposed Q&A-20(a)(2). Thus, the plan looks only at the replacement loan to determine if the limitations under §72(p)(2)(A) have been exceeded. A loan of $10,000 does not exceed Will's loan limit of $13,000, so §72(p)(2)(A) is not violated. In addition, the replacement loan has a repayment term that does not exceed the 5-year rule under §72(p)(2)(B) and the amortization schedule satisfies the requirements of §72(p)(2)© (the drop in the amortization payment after November 30, 2007, is not treated as violating the level amortization requirement). Option #4 - bridge loan to repay first loan. Under this option, Will obtains a third-party loan for $6,000 to repay the outstanding balance on the first loan. He then requests $10,000 as a new loan from the plan. The $10,000 will not violate Will's 50% limit under §72(p) because the $6,000 outstanding balance on the first loan has been repaid before the $10,000 loan is taken. The $10,000 loan can have a 5-year amortization term. Will then uses $6,000 of the proceeds from that loan to repay the third-party lender. The guidance in Proposed Q&A-20 makes this option the least desirable, because the other options, which satisfied the proposed regulation, eliminate the need to involve an outside lender. However, if the plan does not permit refinancing transactions, and also does not allow for more than one loan to be outstanding at a time, Will would have to use this option to accomplish his desired result.</UL>[Edited by Dave Baker on 08-01-2000 at 11:44 AM]

"Too Many Secrets-- How Money Managers Hide Illegalities From Investors" has been published online by Benchmark Financial Services ( http://www.benchmarkalert.com/current/ - August 2000). Excerpt: Securities regulators, law enforcement agencies, pension fund executives and the money management industry itself, together, are responsible for the lack of public awareness of the dangers related to the management of the nation's retirement savings. There has been a concerted effort to conceal the wrongdoing from investors by everyone who might be held accountable, including pension trustees and plan administrators, pension staffs and money managers. What do you make of this?

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